LP3.2 Assignment: Cost of Capital
This assignment will assess the competency 3. CREATE financing alternatives to improve shareholder wealth.
Directions: Christopher William, president of William Industries which produces widgets, has hired you to determine its cost of debt and the cost of equity capital. The stock currently sells for $25 per share and the dividend will be $5. Christopher argues that it will cost us $5 per share to use the stockholders money this year, therefore, the cost of equity is equal to 20%. Furthermore, Christopher believes that the cost of debt is 25%. This is based upon the most recent financial statements which show that William Industries has total liabilities of $10 million and will face total interest expenses for the year of $2.5 million. Christopher argues that the company should increase its use of equity financing because debt costs 25% while equity only costs 20% and thus, equity is cheaper. Is Christopher’s analysis of the cost of equity, debt, and decision to increase the use of equity financing over debt financing accurate? Defend your answers in a 500 to 750-word report and cite your sources.